HSBC says new business is gradually recovering with fresh disbursals across segments touching 50-70% of pre Covid-19 levels. They say now the key focus is likely to shift on post moratorium collection efficiencies, they expect most players will continue to increase their provisions. Within the NBFC space, HSBCs preferred picks are HDFC Ltd, Chola Finance and CreditAccess Grameen.
Retail loans witnessing a gradual recovery:
As the economy is gradually opening up post the pandemic, HSBC observes a gradual uptick in retail loan demand. Segments such as two-wheelers, passenger cars, and individual home loans continue to witness healthy demand improvement on a MoM basis. Within other auto loan segments, tractors, light commercial vehicles (LCVs) and used vehicles are also witnessing improved demand. Meanwhile, momentum in the heavy commercial vehicles (HCV) and construction equipment (CE) segment remains slow. Demand in the microfinance segment is not as big a challenge as collections are and hence the companies engaged in this business are likely to focus a lot more on collections, followed by new business origination. HSBC expects fresh loan disbursements to hover around 50-70% of pre-COVID-19 levels for major players.
Focus on post moratorium collections:
Apart from demand revival, HSBC believes the key focus this quarter is likely to be on post moratorium collection efficiencies across businesses and the outlook for potential one-time loan restructurings. With the loan repayment moratorium coming to an end, customer repayment behaviour will be extremely important to monitor. Given the uncertainty around potential restructuring, HSBC expects most companies within their coverage universe will continue to keep increasing their provisions. As a result, credit costs are likely to remain elevated in Q2 FY21 at levels similar to those seen during Q1 FY21.
Improving liquidity position:
Various measures were undertaken by the government and the RBI to ensure there is sufficient liquidity in the system. This has resulted in the flow of money to non-banking financial companies. (NBFC) The marginal cost of funds is gradually reducing for these NBFCs, which will help these companies to improve their margins.
The key things to focus upon will be the demand outlook for the upcoming festive season and the outlook for potential restructuring and thus the credit costs. Although most players have built adequate provision buffers, any negative surprise on the collections front could dampen investor sentiment.
(Authored by Rahul Kamdar)